Helping seniors preserve health and financial security for themselves and their loved ones.

Sunday, March 30, 2014

Using Custodial Accounts to Provide for Younger Beneficiaries

Do you want to leave part of your estate to your grandchild
or another young family member?If so, you should plan carefully.

Every state has a law that allows a parent or grandparent to
make gifts to young beneficiaries.These
laws are usually called Gift
or Transfer to "Minors" Acts.They allow you to make a gift to a young person, while allowing the
money to be managed by an older and more experienced "custodian."

Custodial accounts can be set up with virtually any bank, broker or
mutual fund and are easy to maintain.You can create them either during your lifetime, or in a Will or Trust
document or beneficiary designation.

Many people put provisions in
their Wills that state that any assets going to someone who is under age 21 will
be held and invested by a custodian until the beneficiary reaches age 21.Without this provision, the minors would
receive their inheritance at age 18.

Until 2003 in Pennsylvania, a "minor" (for purposes
of custodial accounts) was a person under age 21.This meant that a custodian would have to
turn over the funds to the minor when the minor reached age 21.

The problem is, many people are still financially immature on
their 21st birthday.They may still be
in school and have limited experience dealing with money.As a result, many parents and grandparents
would prefer to protect the funds beyond age 21.Until the new law in 2003, they were forced
to create more complicated and expensive trust arrangements.

Since the enactment of Act 50 of 2003, custodial accounts in
Pennsylvania can be designed to continue to age 25. The individual who makes the transfer[i]
specifies the age, up to 25, at which time the money is to be turned over to
the young person.If no age is
specified, then the funds must be given to the minor at age 21. See, 20 Pa.C.S.A. §5321.

What Should You Do?

- If you have already created a Will or Trust that specifies
that gifts to "minors" will be managed by a custodian, you might want
to update that provision.If you want
the custodian to be permitted to continue to manage the account to age 25, your
lawyer can make a simple change in your document to accomplish this.

- Recognize that your grandchildren or other “minors” may someday inherit from you as contingent beneficiaries. An inheritance you have designated to
pass to one of your adult children may instead pass to young grandchildren in
the event the primary beneficiary predeceases you.

- Inheritances can pass to younger persons because they are beneficiaries
or contingent beneficiaries on IRAs, life insurance policies, annuities, and other
assets that may pass outside of terms of your Will or Trust. You may need to specifically update the beneficiary designations
on these assets.

- If your current Will or Trust documents create a trust to
hold funds for minors until they reach age 25, you might want to consider
changing them to use the less complicated custodial account arrangement.

- If you intend to
leave money to a minor and your planning documents do not allow for a custodial
arrangement, be aware that the minor will receive his or her funds at age
18.If you think that is too young to
come into an inheritance, talk to your lawyer about updating your plan.

[i]The Pennsylvania Act does not permit the custodianship to continue until later than the time
the minor attains the age of 21 years where the custodial property is
transferred by a lifetime gift because of federal gift tax issues. The
age 21 limit is consistent with the Internal Revenue Code which permits
“minority trusts” under section 2503(c) of the Internal Revenue Code to continue
in effect until age 21; use of any older age would render the gift ineligible
for the federal gift tax annual exclusion. See, Pennsylvania Joint State
Government Commission, Report of the Advisory Committee on Decedents’ Estates Laws,
PROPOSED PENNSYLVANIA UNIFORM PRINCIPAL AND INCOME ACT AND OTHER PROPOSED
AMENDMENTS, June 2001, http://jsg.legis.state.pa.us/resources/documents/ftp/publications/2001-61-PRINCIPAL.PDF.

Follow me on Twitter

Super Lawyers

AVVO

PAELA

About Me

I am a Pennsylvania lawyer with over 35 years experience in estate planning and elder law. I was selected by US News Best Lawyers® as its Lawyer of the Year in Elder Law for 2014 for the Harrisburg, Pennsylvania metropolitan region.
I am of counsel to Marshall, Parker and Weber, a law firm which has offices in Williamsport, Jersey Shore, Wilkes-Barre and Scranton, Pennsylvania. I am past President and a founder of PAELA (the Pennsylvania Association of Elder Law Attorneys). However, the views expressed on this site are my own and not those of PAELA or of Marshall, Parker and Weber.
Most importantly I am a husband, father and grandfather.